Regulation from a new direction

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Author: Internal Compliance Department

The Competition & Marketing Authority – Regulation from a different direction.

The shape of the High Cost Short Term Credit (HCSTC) industry has changed dramatically since regulation was transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) in April 2014. Not only have the FCA encased the industry with its overarching 11 Principles, with Treating Customers Fairly and Communicating in a way that is clear, fair and not misleading, but it has also introduced some very specific rules to this market segment.

These have included rate capping, limiting rollovers for Payday Loans, restricting the use of Continuous Payment Authority (CPA), health warnings on financial promotions and restrictions on fee charging brokers to name but a few.

So where does the Competition & Marketing Authority (CMA) come in? Before the OFT handed over the reins to the FCA they bought a case to the Competition Commission (which became the CMA) and asked them to look into the payday loans market. The CMA, using their regulatory powers made an Order in August 2015 which will see some more changes having to be made over the subsequent 12 – 18 months. So what is it all about?

The first part of the Order is concerned with Price Comparison Websites (PCW). Everyone should be familiar with the concept of these as companies like Go Compare, Money Supermarket and Compare the Meerkat have been gracing our TV’s for years.

The CMA determined that borrowers needed to be encouraged to make choice between Payday Lenders based on price as this in turn forces lenders to compete on price. While there are now a few online short term loans PCW entering the space, at the moment there are no rules on how the owners of these sites rank or order the lenders who appear on them. As many of these are commercial sites, run to maximise profits, it is not hard to see that the site owners would often order lenders on the basis of how much they were prepared to pay for the click rather than how competitive the loan was for the customer – after all this is what Google and other search engines have been doing for years.

Under the new regulations the ranking table on the PCW will not be allowed to carry ‘adverts’ and will have to rank the loans based on total cost of the loan. There will likely be that customers can filter by such things as loan amount of duration, but again there will be strict rules on how the results are ordered. The FCA has been given the task of implementing these rules and are still (as at Nov 2015) consulting on what the actual basis of the ordering will be. It is looking unlikely to be straight APR based, and is more likely to be based on the total cost of the loan.

Once these PCW are introduced ALL lenders will be required to appear on at least 1 one site and in addition every lender will have to prominently display a link to at least 1 PCW on their own website.

The second part of the Order concerns making borrowers aware of what their borrowing has cost. From August 2016 when any HCSTC comes to an end the lender will have to send the borrower a summary of the cost of that loan. This applies not only when the loan is repaid, but also if it is settled or if it has been 3 months since the last payment was made. This summary report not only has to include details of the recently repaid loan, but also has a section to detail the cost of all borrowing with that lender over the previous 12 months.

When a customer returns to make a subsequent loan the lender must draw their attention to the availability of this report and provide access to it again should the borrower wish to do so.

So how is all of this designed to help?

One of the factors that is hampering price competition in the marketplace is the fact that HCSTC borrowers will often focus on things such as the ease and likelihood of acceptance and speed of delivery of the loan rather than the cost. There is no real price competition which means that in the main lenders do not have to compete on price and though there is now the FCA price caps, many lenders rates are concentrated either at or just below that rate.

This is unlike most other industries that exist. Take the travel industry as an example, people want to go to a particular country or resort then they will often check out many tour operators to get the best price. If Thomas Cook and Thomson both offer packages to that resort then they will continually battle to undercut the other as they know that the lowest one will win the business. This ultimately will force the price down for the consumer. In the HCSTC industry this does not happen, either because cost is not viewed as less important by the borrower, or that it is too difficult to see what the alternatives are.

Now when we introduce the PCW, and insist that lenders promote these, we now have a very powerful tool. Firstly it is a place where borrowers can easily see what is available, but more importantly lenders will have to start fighting for the top spots in a different way. This is no longer a fight based on how much they are prepared to pay the owner of the site, but how much they are prepared to lower their lending costs to compete with the lender for the top spots, and of course top spots means more customers. Suddenly, even if the borrowers do not know it, price completion is being reintroduced to the market. This will ultimately see the cost of some loans to the borrower reduce dramatically.

So while some may feel that this is another regulator wanting a part of the action, these new rules make perfect sense to restore the market dynamics of an industry that has become totally insensitive to price competition.